The Retirement Question
In this issue and the following two, we ask a group of the region’s leading financial advisors to address three different retirement-related questions.
Fragasso Financial Advisors
Retirement readiness is both a lifestyle and a financial decision. First, determine if you are ready to retire. Do you love what you do? Are you working in an environment that values your contribution? Readiness is not determined by age but by a desire to live differently. Is it time to do the things that greater time freedom would allow? Does your spouse or life partner agree? Skipping this lifestyle evaluation can lead to unhappiness.
Once you’ve determined lifestyle readiness, evaluate your finances based on that vision of life and its attendant costs. Rules of thumb to determine readiness are simple and eye-catching, but ineffective. The correct course is both logical and step-oriented, meaning you can follow through to actionable conclusions.
- Put a cost to your desired lifestyle. This includes the monthly cost as well as the periodic, such as annual insurance premiums and travel. Then add 10–20 percent for the unexpected or spontaneous opportunities.
- Factor-in inflation. Do not be lulled by today’s low rate, as the recurring average is 3–4 percent over many decades, so use 3½ percent. You will be retired for 20 years or more. Consider that 4 percent inflation, compounded, means you will need about 50 percent more income in each decade of life just to maintain purchasing power.
- Take an inventory of your liquid and non-liquid assets, adjusting for changes such as buying a different home. Account for paying down debt over time. Gauge the productivity of your investment assets and see what income they will provide along with other income streams such as Social Security and pensions.
- Run all of that data through retirement security planning software. The answers will present themselves along with the adjustments you must make to achieve retirement financial security. This comes down to a simple equation: Money invested at a certain earnings rate over time should equal money withdrawn over time plus the desired estate you wish to leave. If the equation doesn’t come out even, you need to adjust the factors like saving more, retiring later or spending less in retirement. But once you have the data, you are equipped to make those decisions and adjustments.
- Seek professional assistance. This cannot be a do-it-yourself project because most people do not possess the expertise, time and resources to do it alone. Now you can move confidently forward into the next phase of your life called retirement. Planning can help make it happy and fulfilling.
Bill Few Associates
Retirement can be the the best time in a person’s life, but making the actual decision of when to retire can be challenging. The challenge is balancing your personal considerations with your financial resources.
On a personal level, we need to envision what we would like our retirement to look like. My experience has been that for most individuals the vision is simply to retire at a certain age and to maintain their current standard of living throughout their lifetime. For others, the vision may include buying a second home, traveling, or maybe leaving an inheritance.
Another element of the vision may be a desire to pursue a second career or volunteer in order to stay mentally stimulated and engaged in society.
The second half of the balancing act is to determine if the vision is aligned with your financial resources. For most of us, our main concern is, “I don’t want my money to run out before I do.” In the simplest terms, you know you’re financially ready to retire when the combination of your Social Security, pensions and investment income produces enough cash flow to cover all your anticipated expenses for the rest of your life. In some cases, the retirement you envisioned may be a stretch but can be achieved by downsizing or modifying your expectations. In doing this analysis you may find that working for two or three more years, continuing to contribute to your retirement plan, and delaying Social Security can make a significant difference in realizing your vision.
Health can disrupt this balancing act as well. In some cases, the physical and emotional toll of continuing to work outweighs the financial benefits of delaying retirement. For this reason, retirement expectations may need to be modified to safeguard your long-term health. The importance of prioritizing your health ahead of your retirement expectations cannot be emphasized enough. This is a consideration that must not be overlooked.
This question of when to retire is one laden with emotions, predictions and ambiguous financial considerations.
If you wait until retirement, you leave yourself few options. The earlier you start to plan for this transition, the easier it is to influence the outcome of your retirement. A financial adviser can help simplify the complexity of this decision and ensure that your vision and finances are aligned.
Retirement is different now than it was in previous generations. Many issues are interconnected, which need careful consideration when developing a retirement strategy. Furthermore, retirement planning is not about an event or a date, it is a multi-decade decision, so in one regard, it is about a state of being. And more to the point, a change in state of being.
As one considers entering this new phase, there are two broad risks that capture many specific ones in planning for retirement: longevity risk or the risk of outliving your means; and market risk, the impact of volatility in the market on the value of your investments. With longevity, we have actuarial tables that can tell us what each person’s average life expectancy will be, but there is a fair amount of variation. Considering your own longevity chances is key. Studies show us that retirement anxiety is affected by the state of the market in the year of retirement as well as the retiree’s degree of reliance on portfolio returns.
In order to get a handle on these issues, you can start by considering and then planning for the following questions:
- What will I do with my time to fulfill a personal purpose?
- What are my base expenses that will maintain my desired lifestyle? What additional expenses may I incur over time that will need to be considered?
- What balance of my expenses will be covered by fixed income (social security, pension), and therefore, what will I need to draw from my investments?
- What inflation, rate of return and spending increase assumptions should I use to maintain my lifestyle for multiple decades? Are my investments structured for a multi-decade answer to all of the above?
- How am I addressing variables such as healthcare and taxes?
- How do I set up my estate to leave the legacy I would like?
Considering these questions prior to retirement will provide a good start to your journey. But as with any travels, things change. These changes may be by your decision and design or by no control of your own. So updating your plans along the way will be critical, and an objective opinion wouldn’t hurt.
In our experience, the following topics are the major concerns that most, if not all, retirees will face at one point or another. One of these risks is inflation. Planning for a long retirement life must include an investment strategy designed to keep pace with inflation. This is because the longer the retirement period, the more chance for a period of high inflation to negatively impact investment assets and purchasing power. Without proper planning for inflationary periods, you’re exposing yourself to another key risk — longevity. This is the risk that a retiree can outlive their income.
This point leads directly to the risk of not having a proper asset allocation that develops and changes over your life cycle in accordance with market conditions. Market conditions and unexpected life events can lead to changes in your risk tolerance, which needs to be addressed within your portfolio. Your asset allocation strategy needs to be in alignment with your goals, time horizon and risk tolerance.
An important part of the distribution phase is planning for health care expenses in retirement. Longer life expectancies, rapidly rising medical and prescription drug costs, fewer employer-sponsored retiree benefits, and the limitations of Medicare make health care expenses a significant risk in retirement. It is important to obtain adequate health insurance if possible, to supplement Medicare and to have sufficient resources to pay for those costs and other health-related expenses not covered by insurance. A recent study shows the estimated annual out-of-pocket health care costs for a retired 65-year-old. Depending on your health at that age, plan on spending $3,000-$5,000 for someone in very good to excellent health to $7,000-$10,000 for someone in poor health. This figure does not include long-term care costs, which also must be incorporated into a financial plan for retirement.
Last, you must also consider the rate at which you withdraw funds from your retirement assets. A conservative withdrawal rate can decrease the chance of outliving your retirement assets, where as an aggressive withdrawal rate can negatively impact a retirement plan. All goals and withdrawals in retirement should be properly planned for and consistently reviewed to ensure that they are achieving the best possible results given market conditions at the time